Nick Sleep letters – Chapter 4
The next chapter in the Nick Sleep letters, he talks about investing in Weetabix and Lucent. However, there are some interesting points he makes before the summary of each company.
Sleep discusses the importance of good managers who pursue value creation for shareholders. Managers who do so make their companies more attractive to investors because they avoid issues like “Diworsificaiton”.
The term, “Diworsification” was coined by Peter Lynch. It describes the phenomenon where managers looking to grow their businesses start buying companies that are totally unrelated to their own. The effect usually leads to the erosion of value. Here Sleep discusses the theory.
As a rule, it’s best to avoid companies who diversify. Although, astute managers contradict that conclusion. Berkshire Hathaway is an example of a diversified company that proves there are exceptions.
Beyond the diversification issue, Sleep discusses Weetabix and Lucent.
In Weetabix, he sees a 75 year old U.K. company whose brand holds as much recognition amongst the public as does Kellogg’s. He spells out the factors contributing to his thesis for buying Weetabix in detail but this excerpt explains a lot.
He mentions how since Nomad Investments isn’t constrained to focus or specialize on any particular investment, they’re allowed to find value where other funds are prevented. The Weetabix shares trade on the U.K.’s version of the OTC pink sheets. As a consequence, the shares are overlooked and undervalued.
In Lucent, again Sleep looks at an investment most specialists would be prevented from purchasing. The Lucent preferred shares offered investors an incredible bargain – in Peter Lynch terms this would be considered an Asset Play. Sleep outlines the bargain.
This is a scenario where the buyer of preferred shares can’t lose.
I’d recommend reading more of the Lucent trade for anyone looking for an example of a Lynch-style Asset Play. You can find the full story on Page 24 of the Nick Sleep letters.